With billions at stake, banks try to save stunned borrowers
NEW YORK (AP) — Tarred as villains during the 2008 financial meltdown, banks of all sizes are trying to help out Americans reeling from the economic crisis caused by the coronavirus outbreak.
Banks are scrambling to put into place loan forgiveness and relief programs, working to keep their customers from panicking or falling into financial ruin. They have a vested interest preventing millions of people and businesses from defaulting on hundreds of billions of loans at once, something that would do significant damage to the banks’ own finances.
Unlike 2008, banks are not the cause of economic crisis gripping the nation. And banks now have plenty of capital on hand to handle this crisis, economists say.
But the potential for millions of their customers to default on credit cards, small business loans and mortgages means banks have to do something to protect borrowers, many of whom went from having a job or a business to nothing, sometimes in a matter of days.
Husband and wife team Shari and Larry Kaynen were forced last week to close their chain of six high-end clothing stores called Shari’s Place, based in Greenvale, N.Y. They are now working with their bank to rework their long-term debt into new terms with lower interest rates that will help their cash flow.
Larry Kaynen said that their bank is polling all of its retail industry clients to figure out how they are going to stay in business for week with “zero” sales.
“This could mean a lot of ruin to a lot of small business” said Shari Kaynen. “I am not corporate America. I have millions of dollars worth of merchandise, but I still have to pay my landlord rent.”
The aid the bank provide varies in generosity depending on the bank, however. Some are just allowing customers to defer payments, meaning interest is still accumulating while in these programs. Others have instituted forbearance programs, where there will be no penalty for a customer who wants to hold off paying debts for 30 or 60 days.
Huntington Bancshares, a $100 billion bank operating mostly in the Midwest, has instituted 30-day deferral programs for any borrower who asks for help — no paperwork or questions asked — and is reaching out to customers asking if they need more time. They are extending the deferrals 30 days at a time, if necessary.
“There is a place for our industry, in this crisis, to do all we possibly can to mitigate the damage that is happening,” said Stephen Steinour, Huntington’s chairman and CEO.
The bank has even moved employees at its branches — which are operating under reduced or restricted hours to protect against virus transmission — into new roles like calling borrowers or potentially even helping customers refinance their mortgage.
The biggest banks are taking similar actions. Bank of America is allowing customers to defer payments across all of its products and is not reporting any negative activity like missed payments to the credit bureaus. So has JPMorgan Chase, Wells Fargo and Citigroup.
Smaller banks are also acting to help customers. Southern Bancorp, with roughly $1.5 billion in assets headquartered in Arkansas, is modifying loans as quickly as possible or charging only interests on loans where it can for small business borrowers or customers.
“We’re telling our folks, ‘Be safe. Be calm. We’re here to help however we can,'” said Darrin Williams, CEO of Southern Bancorp.
Banks are putting these programs in place partly because they would be facing a massive number of defaults and bad loans on their books without them – causing billions of dollars worth of paper losses to the banking sector. Bank stocks have been hit particularly hard this year as they are considered a proxy for the overall economy. The KBW Bank Index, composed of banks from across the country, is down 45% this year alone compared with the 15.5% decline of the S&P 500.
Further, the credit reporting companies like Experian and Equifax would be swamped with negative credit reporting data, which would destroy the credit scores of millions of Americans who were paying their bills on time but suddenly find themselves out of a job. That would make giving loans in the future to these impacted borrowers more difficult.
Lastly there’s the politics.
The Great Recession was caused by careless banks making too many bad loans, which ultimately required U.S. taxpayers to backstop or bail them out. The bailouts of 2008 and 2009 have not been forgotten by the industry.
While other industries like the restaurants, hotels and airlines have petitioned Washington for aid in the aftermath of the coronavirus-fueled economic meltdown, the banks have largely remained on the sidelines – asking for changes to how bank capital is measured during a crisis and other minor issues. The CEOs of the big banks went to the White House earlier this month to meet with President Trump with a “we are here to help.”
While the banks are not asking for large things in this bailout bill, they know a lot is at stake. By proxy, banks would benefit from any government aid to companies because those companies would in turn continue paying their bills.
“We are in a strong financial position, and because we are doing so well, we can hopefully provide some relief,” Williams said.
While the banks are not asking for a government bailout this time, they have benefited from the recent moves by the Federal Reserve, which has slashed borrowing costs to zero and instituted bond-buying programs to help banks quickly offload high-quality assets for cash. quickly. The Federal Reserve has expanded that to include things like commercial paper, corporate debt and other assets in a way not seen since the Great Recession.
While banks are taking their own actions, State and federal regulators are also stepping in to protect borrowers.
Governor Andrew Cuomo of New York imposed a 90-day moratorium on mortgage payments if a borrower has been financially struck by the outbreak. The Department of Housing and Urban Development has imposed a 60-day moratorium on all evictions and foreclosures on all homes with a loan through the Federal Housing Administration, or FHA.